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April 17, 2012

Comment: Tesco faces bumpy road to UK recovery

A year ago, when Philip Clarke took the reins as chief executive of Tesco, one City analyst told just-food that the retailer's new boss was likely to only have to "fine-tune" the business than "rebuild the engine".

By Dean Best

A year ago, when Philip Clarke took the reins as chief executive of Tesco, one City analyst told just-food that the retailer’s new boss was likely to only have to “fine-tune” the business than “rebuild the engine”.

Twelve months on and, although Tesco has not come to a shuddering halt, Clarke has had to perform a more in-depth MOT on the UK’s largest retailer than many would have imagined.

In recent months, Tesco has attracted headlines for less than positive reasons. A profit warning in January saw the retailer’s shares plunge 15%. Its like-for-like UK sales have fallen for four consecutive quarters. The company’s share of the UK market has eroded. And, Richard Brasher, the chief executive of its UK business decided to leave Tesco after an apparent clash with Clarke over the company’s domestic strategy. Few chief executives in the retail sector would have had a more eventful first year in charge.

When Tesco announced its profit warning, Clarke admitted the retailer had been outmaneouvred by rivals in the promotional battle and said the company needed to invest more in products and service. Since then, Tesco has pledged to make “significant” investments in customer service, improve its fresh food offer and revamp stores to revitalise sales.

On the face of it, the initiatives could cause concern at the likes of Asda, Sainsbury’s and Morrisons. Okay, Tesco’s market share in the UK has dipped in recent months but, according to the most recent Kantar data, the retailer accounted for 30.2% of sales in the 12 weeks to 18 March. A revitalised Tesco could put pressure on rivals operating in one of the toughest retail markets worldwide.

However, Tesco is facing a set of more formidable competitors than, perhaps, it did in the early to mid Noughties. Of course, all businesses face challenges and can always improve. But, under the leadership of Andy Clarke, Asda has integrated the Netto business it acquired last year and its market share is, according to the Kantar data, at a record high.

Last month, Sainsbury’s booked a 2.6% increase in like-for-like sales in its fourth quarter, results, it said, had showed it had “outperformed the market”. Sainsbury’s Brand Match price comparison scheme, launched the autumn, has proved effective in convincing consumers that the retailer, perceived by shoppers to be expensive, can offer value.

And Morrisons is busy investing in its own fresh food offer and rolling out its “Store of the Future” concept that has won plaudits from industry watchers.

The series of initiatives already announced by Tesco to breathe fresh life into its UK business, which also include plans to relaunch its entry-level own-label line and expand its Clubcard scheme, indicate that Clarke, who has taken control of the retailer’s domestic business ahead of Brasher’s planned departure, has rolled up his sleeves and got down to work to revive sales.

When Tesco announces its annual financial results tomorrow (18 April), we are likely to hear more of those plans. However, the retailer will not have it all its own way in the UK, with its closest rivals continuing to adapt their offer and fight keenly for the country’s ever-more promiscuous consumers.

In the run up to the results, Tesco has again faced questions about parts of its international operations, notably its unit in the US. However, elsewhere, the retailer is being urged to focusing on fixing the UK.

“Mr. Clarke’s immediate priority is stabilising and positioning the core chain for at least market level growth; circa 4-5% sales growth & 5.5% EBIT margins,” Shore Capital analyst Clive Black said in a note last week. “We see potential damage to the brand through questionable trading and marketing strategies, such as an over focus on value and Tesco over broader appeal and product, that suggest in our view detachment from the market, potentially arrogance and whatever the precise processes, damage to the Tesco brand. Tesco, therefore, has lost some of its broad appeal and in trying to be everything to everyone increasingly became nothing to a whole lot of people. That potential brand damage is possibly the most serious issue facing management.”

Investors will also want to hear plans for a new permanent CEO for its UK unit. Running Tesco’s business in the UK and its international network of outlets is too much for one executive.

Tomorrow, therefore, we look likely to hear more about Clarke plans to get Tesco firing on all cylinders again. There could be a few twists and turns in the road ahead yet.

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